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A Mixed Bag for Buffalo Wild Wings

The casual dining chain, Buffalo Wild Wings Inc. (BWLD) recently reported fourth quarter 2012 earnings of 89 cents per share; ahead of the year-ago quarter’s earnings of 73 cents per share. However, the earnings missed the Zacks Consensus Estimate of 95 cents. The annual rise in the earnings was led by the company’s strong top-line growth and unit growth, offsetting higher cost of sales.

Total revenues climbed 37.8% year over year to $303.8 million and outperformed the Zacks Consensus Estimate of $295 million. Quarterly revenues were driven by 5.8% and 7.4% same-store sales growth at the company-operated as well franchised restaurants, respectively. Revenues also gained from an additional 62 company-owned restaurants compared with the previous year quarter.

In full year 2012, the company reported earnings of $57.3 million, or $3.06 per share, versus $50.4 million, or $2.73 per share in the prior year. Total revenue grew 32.6% to $1.0 billion.

Behind the Headlines Number

Sales at the company-operated restaurants surged 39.3% to $282.7 million, fueled by the new unit openings and higher same-store sales.

Franchise royalties and fees jumped 20.6% year over year to $21.1 million, thanks to 12 additional restaurants in operation at the end of the quarter compared with the year-ago quarter, an improvement in comps. The company accrued $1.5 million franchise royalties and fees during the fourteenth week of the quarter.

Average weekly sales at the company-operated restaurants increased 6.9% year over year to $55,595 and at franchised restaurants climbed up 9.6% to $58,490.

Restaurant’s operating margin contracted 150 basis points (bps) to 17.8%, aided by a 260-bps hike in cost of sales to 32%, arising from a 46% average surge in traditional wings price and 30-bps hike in labor cost to 30.2% (as a percentage of restaurant sales). This was partially offset by a 70-bps drop in occupancy costs to 5.2% and 80-bps fall in operating costs to 14.7%.

Store Update

During the quarter, Buffalo Wild Wings opened 38 new company-owned restaurants and shut down one franchised restaurant. Buffalo Wild Wings currently operates 383 company-owned restaurants and 510 franchised restaurants.

In the first quarter of 2013, the company plans to introduce 14 new company-owned restaurants in North America and transfer one old unit. The company intends to buy three franchised units and it also expects that nearly 8-10 franchised units will be launched in the quarter.

In 2013, the restaurant chain plans to unveil more than 60 company-owned and 45 franchised restaurants, and also expects to achieve the 1,000 unit milestone by the end of the year.

Liquidity Position

Buffalo Wild Wings ended the quarter with cash and cash equivalents of $21.3 million and shareholders’ equity of $383.4 million.

Outlook

Management witnessed comparable sales growth of 2.6% and 1.6% at the company-operated restaurants and franchised restaurants, respectively, (comps calculated by adjusting the timing of the college and NFL football seasons for 2012 and 2013) for the first six-week period of the first quarter of 2013. However, the comps growth is far below the prior-year period.

The company is undertaking various initiatives like menu and technological innovations and restaurant upgradation. The company with its multi-year agreement with NCAA will focus more on its marketing and promotion to attract customers. The company is likely to extend its coverage further and now expects net earnings growth of 25% in 2013, higher than the prior year growth of 17%.

Our Take

We remain encouraged by the company’s comps growth at both the company-owned and franchised restaurants and debt-free balance sheet. The company’s expectation of a 25% net earnings growth in 2013 is quite impressive. Moreover, the company provides ample growth opportunities, given its plan of opening 1,000 restaurants in the United States by 2013 and 50 in Canada by 2015.

However, the comps growth for the upcoming quarter has not started on a positive note. Moreover, we remain cautious on the stock based on soaring wing prices, lower consumer spending and commodity inflation.

Buffalo Wild Wings currently retains a Zacks Rank #3 (Hold). Another restaurateur AFC Enterprises Inc. (AFCE) recently declared its preliminary fourth quarter and full year 2012 results. The company projects its adjusted earnings per share for the full year of 2012 to be within $1.23-$1.24, up from 99 cents in 2011. AFC also provided an optimistic outlook for 2013. AFC currently holds a Zacks Rank #2 (Buy).

Other restaurateurs, which are expected to perform well moving ahead, include Krispy Kreme Doughnuts, Inc. (KKD) and Burger King Worldwide, Inc. (BKW) both carry a Zacks Rank #2 (Buy), respectively.